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Higher Interest Rates Affect Your Affordability

THE VIEW FROM OAK PARK

The Official Krisztina Blogsite

On May 25th, 2 major banks went on the record saying that Canadians will find it more expensive to own a home this year and in 2011 as higher interest rates are expected to chip away at affordability even as the rise in home prices begins to subside. RBC Economics Research points out that the rising interest rates will increase mortgages and other loan payments. As housing demand cools and supplies increase, the pace of price increases will slow, but won’t fall fast enough to offset the rising interest rates. As we are all aware, the Bank of Canada will raise its key lending rate for banks sometime this summer from the current record lows. Although the rates are predicted to rise very slowly through the rest of 2010 and 2011, affordability will continue to deteriorate even as prices level off.

My suggestion: pay close attention to your housing budget and if you are currently shopping for a home, make sure you complete a thorough cost analysis. Can you continue to afford this home if interest rates rise half a per cent? One per cent? You must factor such increases into your buying power. A recent report found that Canadians today spend 15.6% of their average gross personal income on mortgage payments (about the same as 10 years ago). When you add in electricity bills and property taxes, that figure rises to about 22%.

AND THE MOST IMPORTANT CONSIDERATION RIGHT NOW: If you got your mortgage approval before April 19, you MUST re-apply because the by-laws have changed. You may have been approved for a variable rate mortgage. Now, everybody must be approved at a 5 Year Fixed Rate, NOT the best rate you can find. This is reflective of Canada’s conservative approach to mortgages in order to avoid the U.S. situation of people carrying mortgages for more than the value of their home and I think it is a good gauge to ensure affordability down the line. But beware, when you get approved – this may drop your price point significantly. Some buyers previously approved for about $700,000 are now forced down to approximately $600,000. For some, it may be the difference between moving and not moving. I have had a client who was previously eligible for a $730,000 mortgage with $100,000 down, but now was only approved for $600,000 with the same $100,000 down. These are huge swings!!

And then there are other factors to consider…longer term job security, rising financial demands of older children (camps, sports leagues, vehicle, post-secondary education etc.), rising financial demands of aging parents, replacement timetable for your cars and so on.

And just a reminder, once you’ve been approved for a ‘shopping’ figure at the 5 Year Fixed, I can offer you more affordable payments (for those who qualify) through my relationship with AstrumStar (who has created a coalition with our Re/Max office). Please check my website (KrisztinaNeglia.com) for more information on how you can apply.